Summary
- The Fed uses its Monopoly Money to control rates and yields to drive Treasury markets first and all other bond markets as a consequence of Treasury markets as they push and pull their currency as they please.
- They're currently battling inflation. It's been a tough battle that's affected not only bond markets but also stock markets.
- They have to let things cool down and, in my view, walking relentlessly towards 2.00% will be quite dangerous, both for the economy and for all markets.
William_Potter
The Fed controls both the debt and the stock market. It is a singular institution that reports to Congress, as mandated by the Federal Reserve Act of 1913. While the presidents and governors are independent, I emphasize that the institution itself is not. However, the Fed acts as if it were independent, and Congress does little or nothing to limit this notion.
As a result, the Fed has become a monopoly, using its Monopoly Money to control rates and yields to drive Treasury markets first, and all other bond markets second, as Treasury markets push and pull their currency as they see fit. They are currently battling inflation. It has been an uphill battle that has affected not only bond markets but also stock markets. It doesn't end there, however. The collateral damage is far-reaching.
In particular, you can see how our rising rates have affected the stock markets, our housing market, the revenues and profits of countless companies that now have to pay more to borrow money, and even the U.S. government, which now has to pay higher yields on its bonds, means the government's monetary surplus is being drained, and quickly. All of this is happening while the U.S. is pushing against our debt ceiling, and it's causing chaos and pain, in my opinion.
While the Fed's stated goal is to achieve an inflation rate of 2.00%, there are a wide variety of ways to achieve this. My view is that they should target an inflation rate of 4.50-5.00% and then stop. A "pivot" is not necessary.
They need to let things cool down, and in my view, relentlessly heading toward 2.00% will be quite dangerous, both for the economy and for all markets. Recently, to the Fed's credit, many Fed leaders have been talking about smaller rate hikes and slower timing, while recalling the mistakes made by Arthur Burns and Paul Volcker.
Neither of our political parties will welcome a recession, no doubt, but Democrats are still on guard, and this will hurt them more than Republicans, who only control the House. That's why I suspect Fed officials are being privately pressured, while Janet Yellen and company gently tap them on the shoulder. Inflation may be the "root cause," but our higher borrowing costs for anything should also be part of the Fed's equation, even if they rarely mention it.
My hope, based on the Fed minutes and this week's press conference, is that the rate hike will be only 25 basis points and that the talks will be more subdued than in the past. This would be a boon for the economy and also for the markets, in my view. There has been a pivot so far this year, but no one at the Fed yet. Bloomberg is reporting the DJIA up 2,51%, the S&P 500 up 6,02%, and the NASDAQ up 11%. This is in stark contrast to the painful bruises we all suffered in 2022.
Now, ahead of the Fed meeting, it might be a great time to put some money back into stocks. The Fed appears to be taking a more cautious approach than before. I applaud them for that. We don't need a pivot yet, just a slowdown or a halt to be very positive for the market, in my opinion.
“The prospects for a soft landing have greatly improved.”
— St. Louis President James Bullard, January 18, 2023
For those of us in the market, let's hope he's right!
Original source: author
Editor's note: The summary points in this article were chosen by Seeking Alpha editors.
This article was written by
Mark J. Grant is the global chief strategist at Colliers Securities, LLC. Highlights of a 48-year career in the financial services industry include positions as president of an investment bank, head of capital markets for four investment banks, and serving on the boards of four investment banks. He has been designated a Bloomberg Prophet, one of only 15 globally. Mark is one of the longest-serving hosts of CNBC's "Squawk Box," is frequently interviewed on Fox Business and Bloomberg TV, and is regularly quoted by the Wall Street Journal, Barron's, MarketWatch, and other business publications. His commentary, "Out of the Box," is endorsed by more than 5,000 money managers and financial institutions in more than 46 countries. He is also the author of a book called "Out of the Box and on Wall Street." While Mark's institutional clients include some of the world's largest asset managers, he also works with high-net-worth individual investors. His unique investment strategy is especially useful for individuals who need monthly returns and cash flow. He uses carefully selected closed-end funds and well-known exchange-traded funds to produce monthly income for his clients, currently capable of delivering returns exceeding 10%, but current performance is no guarantee of future results. For more information, email Mark at [email protected]
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